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Investing in foreign stocks to be easier now

May 18, 2010 11:16 IST

Indian investors have had the option to buy shares listed on foreign stock exchanges for a few years. The process is set to get much easier, with the introduction of Indian Depository Receipts.

Just as investors abroad can participate in Indian companies' issues through the American Depository Receipt and Global Depository Receipt route, Indian investors can now invest in foreign companies through the IDR. Standard Chartered Bank will be the first IDR issue, opening May 25.

IDRs are depository receipts that represent ownership interest in shares of an overseas company. The subscribers will receive depository receipts in dematerialised form.

A particular receipt would represent a number of shares; for example, one receipt could represent four shares of the company.

These receipts act as shares and convey the same rights as a normal shareholder, such as access to dividends and voting. The underlying shares would be held by another depository in the country of the issuing company. So, for StanChart, the underlying shares would be held at a London-based custodian.

How to participate

Participating in this issue will be like investing in any Indian initial public offer. Overseas companies wanting to issue IDRs have to get the draft red herring prospectus accepted by the stock market regulator, the Securities and Exchange Board of India and then file it with the Registrar of Companies.

The price band for the issuance would be decided before the issue is open and the usual book building process would be used. Once the price is finalised and allotment confirmed, the receipts would be with the depository.

The guidelines are stricter for overseas issuers as compared to Indian IPOs. Among other things, the companies need to have a strong track record and a history of having recorded three years of distributable profits, of the last five years before the issue.

Investors can apply for these receipts just like an Indian IPO in Indian currency, the minimum amount being Rs 20,000 for retail investors. Qualified Institutional Buyers and non-institutional investors are also allowed. After the issuance, these receipts will be listed on stock exchanges and traded like other securities.

The IDR holder can withdraw shares from the IDR facility, but the reverse is not allowed. However, under the current regulations, the IDR holder will have to wait for one year from the issue date and get RBI's approval to convert IDRs into shares.

Moreover, resident Indians are allowed to hold the shares only for a period of 30 days. Thus, for an Indian investor, selling the IDR on the Indian stock market will be an easier option. Otherwise, the holder will have to sell the shares on a foreign exchange where the stock is listed.

Why IDRs

With IDRs, investors need not use the $200,000 facility (allowed by RBI) to invest in overseas shares. The foreign currency conversion risk gets somewhat limited.

The ease of transaction through a known broker and stock exchange would also help. Investors could also bypass the cumbersome Know Your Client norms while trading with a brokerage abroad. Importantly, the opportunity to invest in a multinational company is the overriding benefit for investors.

IDRs would not be subjected to securities transaction tax, but capital gains tax would be applicable to the holder. And, since dividend distribution tax is not paid by the issuing company, dividends would be taxed in the hands of the IDR holder.

The IDR bears all risks that a normal stock carries. An investor will have to study the company's fundamentals before investing in the IDR.

The IDR will tend to reflect the share price movement in the underlying shares of the company that is listed on the overseas exchange. Also, any adverse change in the overseas currency rate would have a bearing on the share price and dividends. The IDR may also trade at a discount to the underlying shares.

With all this, the overall advantage of investing in quality overseas companies, offers a great opportunity for investors willing to take these risks. The IDR is a stepping stone to global diversification of an investor's portfolio.

Akash Joshi in Mumbai
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